HP in talks to buy EDS, for reported $12B to $13B

MICHAEL LIEDTKE

Published 7:00 pm, Sunday, May 11, 2008

AP Business Writer

Hewlett-Packard Co. is negotiating to buy technology services provider Electronic Data Systems Corp. in a deal that could help the world's largest personal computer maker snap up more data management and consulting contracts.

Palo Alto-based HP and Plano, Texas-based EDS confirmed the talks Monday shortly after The Wall Street Journal reported a deal could be reached as early as Tuesday. Citing unnamed people familiar with the matter, the Journal said HP will pay $12 billion to $13 billion _ a price that translates to $24 to $26 per share.

The two companies declined to comment beyond their confirmation of the talks.

EDS shares soared $5.27,or nearly 28 percent, to finish Monday at $24.13. HP shares dropped $2.49, more than 5 percent, to close at $46.64 as investors fretted over the deal's logistics.

HP ended January with nearly $10 billion in cash. With a market value of about $115 billion, HP could easily use its own stock to finance the purchase.

Like many corporate marriages, bringing together HP and EDS could trigger cultural clashes that ruin the union, said AMR Research analyst Dana Stiffler. "Palo Alto versus Plano wrangling will destroy any short-medium term benefit unless there's a strong integration roadmap," she predicted.

If the deal is completed, it would be HP's biggest acquisition since it bought Compaq Computer Corp. for $19 billion in 2002.

HP has been trying to expand its technology consulting and data management business for years, hoping to challenge rival IBM Corp.'s leadership in the lucrative field. In 2000, HP attempted to buy PricewaterhouseCoopers' consulting division before those discussions unraveled. IBM wound up buying PricewaterhouseCoopers' consulting arm instead.

The demand for technology consulting and customer support services have steadily grown during the past two decades as the automation of corporate America and the rise of the Internet prompted more businesses to hire outside help to help ensure all the computer software and hardware runs smoothly.

IBM's technology services division brought in revenue of $54 billion year, accounting for half of the company's total sales. Combined, EDS and HP's technology services division had about $39 billion in revenue last year.

Acquiring EDS also could yield more government work for HP, which had about $500 million in prime federal contracts in fiscal 2007. EDS is far better connected, with deals worth about $2.5 billion _ putting it among the top 10 among government technology contractors.

Combined, HP and EDS still would lag significantly behind government contractors like Lockheed Martin Corp. and Boeing Co.

EDS earned $716 million on $22.1 billion in revenue last year.

The Texas company has been linked with possible deals previously, including a reported interest by Deutsche Telekom late last year and Dell Inc. before that. None of the companies ever confirmed reports that they were talking.

Former IBM salesman H. Ross Perot left IBM to start EDS in 1962 and practically invented the business of running other companies' computer systems, now called information-technology or IT services. Perot sold EDS to General Motors Corp. for $2.5 billion in 1984 and eventually became so disillusioned with how that deal worked out that he sold his remaining EDS shares to the car maker so he could start a rival service bearing his name.

An outspoken billionaire, Perot became even more famous for running for U.S. president in 1992 and 1996. GM spun off EDS as an independent company in 1996 and remained its largest customer.

EDS was riding high at the start of the decade, despite the dot-com bubble's bursting. But in late 2002, earnings shortfalls led to investor lawsuits, a Securities and Exchange Commission investigation, the ouster of the chief executive, and a sharp drop in the stock price.

The company lost $1.7 billion in 2003, but it gradually righted itself under CEO Michael Jordan, a retired CBS and Westinghouse CEO who was hired to lead a turnaround. Jordan fixed some money-losing contracts, including a multibillion-dollar deal to build a communications network for the Navy and Marine Corps, and began cutting costs by sending thousands of jobs to low-cost countries such as India.

Although he hasn't seen any signs to suggest EDS has been looking for a buyer, Jefferies & Co. analyst Joseph Vafi said the company's board might have decided a sale would create a quicker payoff for shareholders than trying to grow the company in the highly competitive technology services industry.

HP has been on a roll since it hired Mark Hurd as chief executive three years ago. Since then, it has surpassed IBM as the world's largest technology company, based on revenue and supplanted Dell as world's the top seller of personal computers.

The success has helped HP consistently deliver profits that top analyst estimates, which has helped to more than double the company's stock price since Hurd's arrival.

Under Hurd's leadership, HP bought business software maker Mercury Interactive Corp. for $4.9 billion in 2006 and last year paid $1.7 billion for data management provider Opsware Inc., which sold a large chunk of its operations to EDS in 2002.

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AP Business Writers David Koenig in Dallas and Dibya Sarkar in Washington, D.C., contributed to this story.